Sales Tax for Online Sellers: Nexus, Registration and Collection
How U.S. sales tax works for online stores, including economic nexus after Wayfair, marketplace facilitator laws, registration steps, exemptions and how platforms help.
U.S. sales tax is set by states and localities, not by the federal government, and online sellers must collect it in each state where they have a tax obligation, called nexus. You generally have nexus in your home state and anywhere you have a physical presence, such as an office, warehouse, inventory or employees. Since the 2018 Supreme Court decision in South Dakota v. Wayfair, states can also require remote sellers to collect tax once their sales into the state pass an economic threshold. Many states use $100,000 of sales as the threshold, and some have dropped the separate transaction-count test, but thresholds and measurement rules differ, so check each state.
This is general information, not tax advice. Sales tax is complex and changes often, so confirm with the state department of revenue or a CPA.
Key terms
| Term | Meaning |
|---|---|
| Nexus | A connection to a state that creates a duty to register and collect sales tax |
| Physical nexus | Presence through property, inventory, employees, offices or sometimes representatives |
| Economic nexus | Obligation created by sales volume or transaction count into a state |
| Seller's permit | State registration that lets you collect sales tax; names vary (sales tax license, certificate of authority) |
| Marketplace facilitator | A marketplace that collects and remits tax on behalf of sellers who use it |
| Origin vs destination sourcing | Whether tax is based on the seller's location or the buyer's location |
| Exemption certificate | Document that shows a buyer or item is not subject to tax |
Step 1: Know where you have nexus
Start with your home state and any state where you store inventory. Inventory stored in a third-party fulfillment center can create nexus in the states where it is held, which surprises many sellers. Then track sales by state. Most platforms have reports that show orders and sales by shipping state, and you should check them monthly against thresholds.
Common economic nexus thresholds are expressed as dollar amounts of sales in a state in the current or previous calendar year, and in some states as a number of transactions. Do not rely on a single number: look up each state's rule, including whether marketplace sales count toward the threshold and what the measurement period is.
Step 2: Understand marketplace facilitator laws
Nearly all states with a sales tax now have marketplace facilitator laws. If you sell through a large marketplace that qualifies, the marketplace usually collects and remits sales tax on those sales. You may still need to register and file for sales made on your own website or other channels, and in some states you must report marketplace sales. Check the rule in each state where you sell.
Step 3: Register before you collect
You normally need to register with the state before collecting tax. Collecting without registering is a problem in most states. Registration is usually done online through the state's revenue or comptroller website and often requires your business details, EIN, expected sales and a description of your products. Some states charge a fee, many do not.
Step 4: Configure your platform
Ecommerce platforms allow you to set tax rates and rules. Many can calculate tax automatically for the states where you tell them you are registered. Options:
- Use the platform's built-in tax tools for basic cases.
- Use a third-party tax service that calculates, reports and sometimes files returns, with a monthly fee that may rise with volume.
- Enter rates manually if you only collect in one or two jurisdictions, with the risk of errors from local rate changes.
Tax rates depend on the destination address for most states, and some states have local taxes with district-level rates. Always test with sample addresses.
Step 5: What is taxable
Taxability depends on the state and product. Tangible goods are generally taxable, but many states exempt groceries, prescription drugs or clothing under certain prices. Digital goods and software are taxable in some states and not in others. Shipping and handling charges are taxable in some states and exempt in others, depending on how they are presented. Services are often not taxable but some are. Always check the rules for your product category in each state.
Step 6: File and pay
Each state sets its own filing frequency, commonly monthly, quarterly or annually based on volume, and due dates. File even if you collected no tax in a period when the state requires a return. Keep records: orders, tax collected, exemption certificates and filing confirmations. Late filing can lead to penalties and interest.
Step 7: Exemptions and resale
Wholesale customers who resell your product usually provide a resale or exemption certificate, and you must keep it. Nonprofits and government buyers may be exempt in some states. Accepting an invalid certificate can leave you liable for the tax. Platforms may have tools to store certificates.
Worked example (illustrative)
A seller in State A ships a $100 order with $8 shipping to a buyer in State B. Assume State B taxes goods at a combined 7% and also taxes shipping when the item is taxable. Tax is 7% of $108, or $7.56. If the seller has no nexus in State B, the seller does not collect it, though the buyer may owe use tax. If the seller exceeds State B's economic threshold, the seller must register, collect and remit. These rates are examples only.
Mistakes to avoid
- Assuming that no physical store means no tax duty
- Ignoring inventory held in other states
- Collecting tax without registration
- Setting the same tax rate for all orders
- Forgetting to remit what you collected
- Using a seller's permit improperly for personal purchases
Federal items to know about
Sales tax is separate from income tax. Payment platforms may report your payments on Form 1099-K when federal thresholds are exceeded, and the threshold has changed more than once in recent years; check the IRS for the current figure. Your income is taxable whether or not you receive a form.
When to consult a professional
If you sell in several states, hold inventory outside your home state, or sell products with unclear taxability, hire a CPA or a sales tax specialist. A voluntary disclosure program may help if you discover past non-compliance; states typically offer these, and a professional can advise on using them.
Frequently asked questions
Do I have to collect sales tax if I sell only online?
Yes, if you have nexus in the buyer's state. Online-only sellers can have nexus through physical presence or economic activity.
Does a marketplace handle sales tax for me?
Usually for sales made on that marketplace under facilitator laws, but not for sales on your own website.
What if I sell small amounts?
Thresholds protect many small sellers, but your home state rules may still require registration from the first sale.
Can I charge sales tax without a permit?
Generally no. Register first.
Sources
- Streamlined Sales Tax Governing Board — multistate sales tax simplification information
- Federation of Tax Administrators — links to state revenue departments
- Internal Revenue Service — federal reporting rules and Form 1099-K
- Your state department of revenue — registration, rates and filing
